Very popular among traders, the Bollinger Bands indicator is used to measure volatility as well as forex trading when the market is in sideways conditions. This indicator is worth checking out for forex traders.

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What is the Bollinger Bands indicator?

The Bollinger bands indicator was created by John Bollinger, a technical trader in 1980. Bollinger bands are one of the technical indicators to measure volatility and determine the trend direction of price movements. 
 
Well, in addition to the trend direction, this indicator is also used to determine the state of overbought and oversold. The characteristic of this indicator is that in a sideways (ranging) market condition, the price moves between two bands (bands). 
 
Sideways is a market condition when it is flat, where there is doubt in the market. Bullish (rising prices) and bearish (falling prices) are both strong causing sideways conditions.  This indicator is in the form of a line drawn in and around the structure of the price movement of a traded asset.

The Bollinger band will indicate the relative boundary of a price rise or fall. Today, this indicator is very popular in trading in various types of financial markets, including the forex market. Before traders go into the discussion of how to use bollinger bands, you can fill out the Trader Assessment if you need your trading consultation on GIC.

Squeeze

Squeeze is the central concept of Bollinger Bands. When the bands are close to each other, narrowing the moving average, it is called squeeze. A squeeze signifies a period of low volatility and is considered by traders to be a potential sign of increased volatility in the future and possible trading opportunities.
 
Conversely, the wider the band moves, the more likely it is to drop volatility and the more likely it is to exit the trade. However, this condition is not a trading signal. The bands do not give an indication of when a change may occur or in which direction the price may move.

Breakouts

About 90% of the price action occurs between the two bands. Any breakout above or below the band is a major event. Breakouts are not trading signals. The mistake most people make is believing that a price that reaches or exceeds one of the bands is a signal to buy or sell.
 
Breakouts do not provide any clues about the direction and level of future price movements.

How to use bollinger bands?

Many say that the Bollinger Bands indicator and the simple moving average are two 'brother' indicators. Why is it called 'brothers'? Apart from the fact that these two indicators both have a simple, uncomplicated, and relatively easy to understand appearance, the Bollinger Bands indicator consists of a simple moving average (SMA) with two bands or bands above and below the SMA line. 

Simply put, this indicator consists of three lines that move following price movements, including the upper band, middle band, and lower band. The upper band is called the upper bollinger band and the lower band is called the lower bollinger band. While the middle band is the moving average which is the basis for the calculation of the upper band and lower band.

Usually, the middle band used is a simple moving average. The upper and lower bands are determined based on the addition and subtraction of the SMA value with a standard deviation. Standard deviation measures volatility to how far the price can move from its true value. The following is the formula or bollinger bands formula.
  • Middle band = 20-day simple moving average (SMA)
  • Upper band = 20-day SMA + (20-day standard deviation of price x 2)
  • Lower band = 20-day SMA - (20-day standard deviation of price x 2)
Because it also takes into account the measurement of volatility, the two bands will move according to market conditions. The greater the volatility, the wider the distance between the bands. And vice versa.

That way, the Bollinger Bands can help you to recognize the current market conditions. When the BB is in a wide condition, it means that the market is in a crowded state. However, when the BB is in a narrowing condition and tends to move flat, it means that the market is in a quiet state.
 
In general, the condition of being declared overbought occurs when the price has touched the upper band, but the closing price is still below the upper band. Meanwhile, the condition is declared oversold if the price has touched the lower band, but it is still closed above the lower band.

How to set bollinger bands?

For beginner traders, doing the Bollinger Bands Indicator setting may seem difficult, but don't worry, you can follow the following method.

1. Open your MetaTrader platform

Choose the chart view of your favorite currency pair. Forex Bollinger Bands indicators are usually available (built-in) on online trading platforms, including MetaTrader 4 and MetaTrader 5.

2. Setting bollinger bands indicator

Look for the 'Insert' menu, select 'Indicators', then 'Trend', and select 'Bollinger Bands'. Use the default parameters of SMA 20, and standard deviation of 2. Standard deviation is a method that is often used in statistics used in trading.

On the BB indicator, the standard deviation is to see the limits of price movements in a single unit of time. The calculation of this score itself is carried out in middle BB which is also SMA-20. So, if in statistics look for deviation values between data. Meanwhile, in this BB, you are looking for data with a standard deviation that is already known.

3. Perform technical analysis 

After setting the Bollinger Band, then do technical analysis to be able to read the trend direction and observe the development of the price past and present, from the forecast it will help you to be able to read the movement of the trend direction of the price movement of the currency pair that is being traded.

What are the benefits of the Bollinger Bands indicator?

1. As a measure of volatility

The measure of market volatility is usually seen in the width of the bands. If volatility is high, then the distance between the two bands will widen. This usually happens when market conditions change from sideways to trending conditions.

In contrast, low market volatility appears in the narrowing distance between the two bands, and usually occurs when there is a change in market conditions from trending to sideways. Trending means that the price shows a tendency to move in one direction either up or down.

While sideways means that the price tends to move up-down-up-down in a certain range only (limited).

2. Determining a position when the market is sideways

When the market tends to be sideways, then an open position (entry) can be done when the price has crossed (broken) the SMA-20 line with the target at the nearest band level, then traders can read the Bollinger Bands indicator as follows.
  • If the price breaks through the SMA-20 level upwards, then an entry is made when the candle closes above the SMA-20 with a close position (exit) target when the price reaches the upper band.
  • If the price breaks through the SMA-20 level in the downward direction, then an entry is made when the candle closes below the SMA-20 with a close position (exit) target when the price reaches the lower band.

3. Determining positions when the market is trending

In addition to being used for forex trading when the market is in sideways conditions, the Bollinger Bands indicator can also be used when the market is trending, but with some rules. An uptrend condition occurs when the price has passed (breaked) the upper band and the closing price is outside the band.

A downtrend condition occurs when the price crosses the lower band and closes outside the band. As a confirmation, it can be determined from the next bar formation. If the next bar formation is completely outside the band, then a trend has formed. In addition, attention is also paid to the fact that in trending conditions, both bands tend to move wider.

Still having trouble understanding the basic techniques of forex trading? 

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In addition, on YouTube GIC, traders can also learn to trade for free! What are you waiting for? Get more features that fully support you to start investing and trading forex through GIC. Make transactions simpler, safer, and more profitable. Start by creating a demo account and try out a variety of indicators including the parabolic SAR indicator.